When is it time to file bankruptcy?
Many people are having difficulty in repaying their mortgage, car loans or credit card bills due to job loss or simply because they don’t make enough money. If this is the case for you, and if your creditors are hounding you for payments, then this could be the right time to file for bankruptcy.
However, depending on certain conditions, you will need to find out whether chapter 7 or chapter 13 is suitable for your case.
Read the factors mentioned below to make up your mind.
Conditions for Filing Chapter 7 Bankruptcy
If you have just lost a job or other source of income, and are sure that you will not be able to get another job or raise money through any other method in the near future, then you could file for bankruptcy under chapter 7.
If you have insufficient assets on hand, then chapter 7 bankruptcy may be right for you. You will, however, need to pass the ‘Means Test’ organized by the bankruptcy court - in which your gross income will be calculated for the previous 6 months and compared to the average median income of a similar sized family in your area.
If your income is lower and you have no other means of paying off your creditors, then you could qualify for filing bankruptcy under this chapter. In such a case, the court will appoint a trustee who will compile a list of all your non-exempt assets and sell them off in order to pay off your creditors.
The rest of your debt could be discharged (i.e., canceled by the court). However, as an individual, if you do not pass the means test, then you will have no choice but to file for bankruptcy under chapter 13.
Conditions for Filing under Chapter 13
If you are unable to file for bankruptcy under chapter 7 due to income restrictions, or if you have many debts that are not dischargeable under chapter 7, then you will have to file under chapter 13.
In this case, you will need to come up with a repayment plan to clear off your old debts within a span of 3 to 5 years. The court will have a look at your plan, along with your creditors. Once approved, you will need to abide by the new repayment plan.
Filing under this chapter will save most of your assets from being taken away by the court - and you will have a new chance to clear off your debts in a structured way. If you have found a lower paying job, or have other regular income, then this could be the chapter for you.
Most people first try to file for bankruptcy under chapter 7, since some of the debts could be discharged. Under chapter 7, most cases are settled in 4 months, as opposed to the 3 to 5 years that you would need to clear off your debts under chapter 13.
In a nutshell, you should know your financial position at the time of filing for bankruptcy. You should also look into how you can arrange to have a regular income for your restructured payment plan before you file for bankruptcy.
Your bankruptcy attorney can guide you as to which chapter will be more helpful in getting you financially stable in the long run.